Nickel News Roundup

April 13th, 2023

Market Overview:

Digital assets experienced bullish performance this week, as Bitcoin broke through $30,000 for the first time in nearly a year.

Bitcoin sustained a run above $29,000 for the first time since June 2022
Bitcoin’s weekly high of $30,480 was its highest price in over 10 months
Bitcoin’s current price of $30,100 is up 6.9% from last week
Ether diverged slightly from Bitcoin, as Tuesday saw large-scale selloffs in anticipation of Ethereum’s network upgrade unlocking large amounts of Ether in staking contracts
Ether reached a weekly high of $1,934 on Tuesday, following a low of $1,832 on Sunday
Ether’s current price of $1,925 marks a flat weekly performance
Total Ether supply dynamics remain deflationary with annual net issuance currently at -0.23% yearly
Overall market capitalisation grew to $1.23tn
According to industry monitoring site DeFi Llama, total value locked in DeFi this week across all blockchains and platforms increased to $51.4bn

Bitcoin broke through the $30,000 barrier for the first time in over 10 months, and activity elsewhere in the digital asset sphere was similarly buoyant. JP Morgan, Bank of America, and Andreessen Horowitz all released reports acknowledging the sector’s year-to-date strength (and the catalysts driving it), Singapore and Hong Kong both moved to improve banking access for industry firms, FTX recovered more funds as part of its bankruptcy process, VCs raised more funds after a quiet Q1, Bitcoin’s hash rate hit record levels, and Ethereum safely executed its most significant network upgrade since the move to Proof-of-Stake consensus.

What happened: New JP Morgan report calls banking crisis “vindication” for crypto sector

How is this significant?

A new report by JP Morgan, written by analyst Nikolaos Panigirtzoglou, noted digital assets’ recent strong performance despite regulatory hostility, citing the ongoing global banking crisis as a key reason for their appreciation
Panigirtzoglou noted that “the intense shift in U.S. bank deposits to U.S. money market funds is viewed by crypto supporters as a vindication of the crypto ecosystem”
He also wrote that the banking crisis “exposed the weaknesses of the traditional financial system given bank’s maturity mismatch is susceptible to bank runs”
Additionally, he pointed towards the next Bitcoin halving event as a possible catalyst for continued outperformance versus other hedge assets like gold
Every 4 years (or every 210,000 blocks, to be precise), the amount of Bitcoin generated (i.e. mined) per block is halved; the next halving will take place in April 2024, and reduce the amount of new Bitcoin entering supply from 6.25 per block to 3.125
Panigirtzoglou believes this will essentially double the cost of generating each new Bitcoin to about $40,000, creating a “positive psychological effect” for the market, as the mechanical cost of Bitcoin mining historically functions as a lower limit for its value

What happened: Singapore plans new crypto guidance

How is this significant?

Although it’s moved to limit retail access since last year’s FTX meltdown, Singapore remains broadly supportive of digital asset businesses, and moved to create uniform digital asset guidance for banks this week
The Monetary Authority of Singapore (MAS) is collaborating with the city-state’s banks and police to create uniform standards and “fine-tune their vetting approach when opening accounts for service providers in all types of digital assets”
Sources said a report outlining best practice could be published within the next two months, and cover considerations for a plethora of digital assets including stablecoins and NFTs
Speaking to Bloomberg, a MAS spokesperson said “Banks make their own determination of whether to start or continue a banking relationship with a customer, balancing between commercial considerations and business risk tolerance”
Creation of unambiguous rules for digital asset businesses could prove a boon for Singaporean banks; especially since the ongoing tumult in the US banking industry has led to widespread unbanking of crypto firms

What happened: Bank of America lauds Bitcoin flow to personal wallets

How is this significant?

Strategists at Bank of America (BofA) analysed Bitcoin’s recent run, where it outperformed all other asset classes in Q1, and theorised that outflows to personal wallet addresses could bode well for continued growth
According to their research, a net $368m was withdrawn from exchange wallets into personal wallets (blockchain addresses to which the individual controls the private keys) in the week through April 4th; the second-highest weekly flow this year
BofA strategist Alkesh Shah and Andrew Moss wrote “Investors transfer tokens from exchange wallets to their personal wallets when they intend to hold them (or HODL) [over longer timeframes], indicating a potential decrease in sell pressure”
In contrast, Ether saw its largest year-to-date net inflows towards exchanges that same week, ahead of the blockchain’s Shanghai upgrade unlocking Ether currently held in staking contracts, acting as validator nodes on the network
Despite this, flows to personal wallets can also be observed on Ethereum; leading decentralised exchange (DEX) Uniswap handled $70bn of trades in March, compared with $49.2bn for leading American exchange Coinbase

What happened: Ethereum’s Shanghai network upgrade unlocks staked Ether

How is this significant?

The Ethereum blockchain underwent its biggest upgrade since last year’s shift to Proof-of-Stake consensus, as this week’s Shanghai update allowed users to withdraw Ether committed to staking contracts
In Proof-of-Stake consensus, validator nodes (each consisting of 32 Ether being staked in a smart contract) help secure the network, replacing the previous energy-intensive Proof-of-Work consensus model run by miners
Shanghai (or rather, “Shapella”, named for the concurrent Shanghai and Capella network upgrades) enables stakers to withdraw the Ether from their nodes
Some market observers voiced concern over the upgrade potentially bringing all Ether currently committed to validator nodes—around 16% of total Ether supply—back into circulation, especially as some users have been staking since December 2020
However, a report from industry analytics firm Glassnode surmised that hypothetically, even partial withdrawals limited to staking rewards would take around 5 days for all 562,000 validator entities
Regarding full withdrawals (i.e. shutting down a validator node to recover 32 Ether), there is a limit of 1,800 nodes withdrawing per day, or a maximum of 57,600 Ether
Glassnode estimates up to 170,000 ETH ($317 million) could be sold by validators in the week following Shanghai; deemed within the realms of “acceptable [price] impact”
Whilst BofA analysts didn’t foresee any significant increase in sell pressure as a result of the unlock, they did anticipate heightened volatility in the immediate timeframes around the network upgrade
They noted that Ethereum still needs to improve its transactional scaling, “but [the Shanghai upgrade] acts as a precursor for future upgrades, providing a small step forward”
In the immediate aftermath of the upgrade’s deployment, analysts confirmed the network as “stable”

What happened: VC News—Big raises despite decreased market-wide funding

How is this significant?

Numerous digital asset firms confirmed or completed large raises this week, even amidst news that Q1 witnessed a sector-wide 80% year-on-year VC funding decline
Pitchbook data revealed $2.4bn of VC funding for Q1 2023, compared to $12.4bn in the same timeframe in 2022
One significant area of VC growth this year has been artificial intelligence; and blockchain firms dealing with A.I. have benefitted from its rise; CryptoGPT raised $10 million from DWF Labs at a $250 million token valuation
The investment will be realised over a 286 day vesting period, with DWF additionally taking on market-making duties for the CryptoGPT token
DWF Labs also invested $10m in crypto payments provider Alchemy Pay, at a $400m valuation
The Singapore-based firm seeks to link crypto companies with fiat onramps, and will use the funding for expansion into South Korea, capitalising on “the region's high level of cryptocurrency acceptance”
Sei Labs raised $30m across two funding rounds, including investors like Jump Crypto and MultiCoin Capital
This brings their valuation to $800m, with the majority of the recent raises earmarked to drive Asia-Pacific expansion efforts for its trading-focused Layer-1 blockchain
Digital asset exchange Bitget announced a new $100m investment fund for Web3 startups
Bitget MD Gracy Chen told industry publication Coindesk “The launch of Bitget Web3 Fund is a continuation of our ongoing efforts to drive the adoption of crypto and Web3, reflecting our ‘Go beyond derivative’ strategy in 2023”
A recent SEC filing revealed gaming VC Bitkraft raised $220.6m (out of a $240m target) for their second “token fund”, following a 2021 fund that raised $75m for blockchain gaming and digital entertainment investments
Bitkraft partner Carlos Pereira told Coindesk that their strategy involves a combination of equity and token purchases; “If we own both the equity and the token, we can design a game that maximises value creation through primary sales and maximises value creation through secondary sales”

What happened: Hong Kong continues to facilitate digital asset involvement

How is this significant?

Hong Kong’s push to become a regional—and increasingly, global—digital asset hub exhibited further activity this week, with moves to increase banking and investment access
The city’s largest virtual bank introduced fiat-to-crypto conversions in partnership with licenced local exchanges, alongside account services for the digital asset sector
ZA Bank, founded by Chinese billionaire Ou Yaping, “will act as a settlement bank for clients to allow withdrawals in Hong Kong, China and US currencies after they deposit crypto tokens with exchanges” according to CEO Ronald Iu
After a trial in a regulatory sandbox that onboarded over 100 businesses, ZA is now offering online accounts to local Web3 startups and SMEs, although crypto conversion won’t be offered to mainland China customers at this time due to regulations
Iu acknowledged the challenges for businesses caused by US banking’s meltdown, stating “For the dozen of interested firms, big or small, from abroad and local, top of their concern is to have a path to make things work”
Hong Kong digital asset wealth manager Metalpha aims to provide digital asset exposure to Chinese investors, via a new $100m fund
The firm has already secured $20m for the fund since March, according to Metalpha president Adrian Wang
Metalpha’s fund aims to achieve exposure through investment in Grayscale products, such as their GBTC fund
Wang told Bloomberg “A lot of our clients are family offices with traditional backgrounds, rather than pure crypto or pure web3 native investors… It’s overseas Chinese institutions—some of them are family offices, some of them are public companies”

What happened: Contagion latest—FTX considers relaunch

How is this significant?

The most recent hearing in FTX’s current bankruptcy case brought with it a combination of good, frustrating, and surprising news
On the positive front, the company has now recovered “$7.3 billion in cash and liquid crypto assets, an increase of more than $800 million since January”
According to FTX attorney Andy Dietderich “The situation has stabilised, and the dumpster fire is out”
He also noted that the company benefitted from recent appreciation within the digital asset sector, with a total recovery “valued at $6.2 billion based on crypto prices from November”
Regarding frustration; more details emerged over the scale of mismanagement during Sam Bankman-Fried’s tenure, with a new report from FTX debtors stating “the FTX Group was tightly controlled by a small group of individuals who showed little interest in instituting an appropriate oversight or control framework”
The report cited “hubris, incompetence, and greed” as key factors that “caused the FTX Group to collapse as swiftly as it had grown”
In terms of surprises, many industry observers were caught off-guard when Dietderich revealed in court that FTX could relaunch its exchange business, possibly using some of the $7.3bn recovered thus far, with a decision to be made in Q2
Money for this purpose could however also be raised externally, if interested investors can be found
He noted that restarting FTX would require significant capital, as lax internal controls made the previous app a “facade”; “because the existing customer interface had little connection to the movement of money behind the scenes”
In other news, contagion-hit Digital Currency Group will begin charging fees for access to its Foundry mining pool service
Trading firms Jane Street, Radix, and Tower were revealed as the three “VIP” clients cited in the CFTC’s lawsuit against Binance, alleging geographic access for the US-based quant trading giants

What happened: Regulatory news

How is this significant?

A new 39-page report from the US Treasury Department recommended changes to the law in order to address the rise of decentralised finance (DeFi)
The report stated DeFi platforms “need to comply with anti-money laundering and sanctions laws”
Due to their inherently decentralised nature, this could be hard to directly enforce; so such guidance could lead to geo-blocking of DeFi websites, akin to the “Great Firewall” of China
A new EU report called for mandatory registration, licencing, and tighter identity checks for digital asset businesses; “It is critical that countries around the world implement the recommendations from the Financial Action Task Force’s Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers”
According to the report, outright bans are not the best approach to addressing illicit transactions conducted with digital assets; instead it recommends that police be better trained with expertise and access to blockchain analytics tools

What happened: Bitcoin hashrate continues record-breaking run

How is this significant?

Bitcoin’s hash rate (the amount of computational power required to mine Bitcoin) increased for the fourth time in a row, continuing its rise across record-breaking levels
The hash rate is adjusted on a roughly fortnightly based, based on how much competition there is on the network to mine Bitcoins
Higher hash rate therefore serves as a proxy for a variety of factors, including security; the more different miners are competing on the network, the greater its decentralisation and immunity to 51% attacks
Miner revenues increased in line with Bitcoin’s year-to-date rise; in March Bitcoin miners made $755m from Bitcoins mined (aka block subsidies) and transaction fees combine; the vast majority of value coming from the former
However, whilst hash rate is at record highs and miner revenues have increased, miner profitability is well below record highs, due to 2022’s combined effect of decreased Bitcoin value and increased energy costs

What happened: Andreessen Horowitz (a16z) publishes second annual “State of Crypto” report

How is this significant?

Venture capital giants a16z released their second “State of Crypto” report on Tuesday, providing one of the most exhaustive annual analyses of the sector
Their report aimed to go beyond price fluctuations and concentrate on “signals that matter, including the durable progress of web3 technology”
They also launched an interactive index, tracking monthly statistics across 14 different metrics to provide a snapshot of general activity and enthusiasm within the sector
A16z found “a healthier industry than market prices may indicate, and a steady cycle of development, product launches, and ongoing innovation”
Last month, they counted more than 15 million active blockchain addresses, the highest amount ever, indicating that crypto winter hasn’t killed off enthusiasm for the asset class despite prices remaining well below all-time high levels
Additionally, they lauded improvements in blockchain infrastructure; particularly the rise of new Layer-1 networks, new Layer-2 scaling solutions (primarily for Ethereum) exhibiting increased usage, and zero-knowledge proofs (cryptographic technology which could improve both scaling and privacy)
They did however caution that “the USA is losing its lead in Web3”, encouraging “thoughtful regulation” to “grow these technologies safely in the U.S”
They also noted more than $100bn in monthly DEX trading volume, lauded the success of Ethereum’s “Merge” into Proof-of-Stake consensus, and encouraged zooming out from short-term volatility to better appreciate the price-innovation cycle of crypto

What happened: Former PayPal president helms Bitcoin scaling project

How is this significant?

Ex-PayPal president David Marcus spoke to industry publication The Block this week, outlining the efforts and progress of his digital asset firm Lightspark since they secured $175m in funding a year ago
Lightspark revealed their product suite on Tuesday, building on Bitcoin’s Lightning Network scaling solution
In particular, Lightspark’s work concentrates on facilitating connection to and use of the Lightning Network; he told The Block “We're very focused on rails and not assets”
Lightspark leverages A.I. machine learning to predict liquidity movement on the Lightning Network, whilst simplifying its integration into external platforms; co-founder James Everingham stated that they remove a lot of the “manual stuff which is pretty far beyond what a small business or someone that wants to connect to Lightning would do”
This in turn should enable integration for Bitcoin payments across a wider variety of businesses; “with a solution like this many independent players (imagine 100s of retail stores) can start giving more reliable payments to their end customers without hiring their own teams to manage 'enterprise grade lightning' like Strike or Cash App had to”

Nickel News Roundup - Week 15

April 13th, 2023

Market Overview: